What Bankruptcy Alternatives Are Available?
Is Debt Settlement or a Debt Management Plan a Better Solution?
Jun 30, 2009
A report from Automated Access to Court Electronic Records (ACER) showed that 6,020 U.S. consumers declared bankruptcy each day during May 2009. Nevada, Michigan and California were the States that were worst affected. Identifying a suitable bankruptcy alternative may seem unlikely but there are other ways that U.S. consumers can overcome their financial difficulties.
What Bankruptcy Alternatives Exist?
Both debt settlement and Debt Management Plans are potentially viable bankruptcy alternatives, but the pure scale of serious personal debt means that they are now less likely to help. David Jones, president of the Independent Consumer Credit Counseling Agencies stated that: "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%."
Manage Personal Finances with a Debt Management Plan (DMP)
Unlike filing for bankruptcy, a Debt Management Plan (DMP) doesn't involve any write-off of credit card balances. It involves making a single monthly repayment to an intermediary (a charity or private company) that makes a pro rata payment to creditors. The majority of lenders are prepared to freeze both interest and further charges. The lower monthly repayment helps to alleviate financial difficulties. The major problem with DMP's is that it can take a number of years to clear the money owed.
Write-off Credit Card Balances with Debt Settlement
A further bankruptcy alternative is debt settlement. Private companies will negotiate with creditors to arrange a debt write-off in return for a monthly contribution over a three year period. Personal debt is often reduced by up to 50%. The main criticism levied is that charges are front-loaded. This means that the amount owed will initially increase so creditors may not receive payment for several months.
Reach a Private Agreement with a Creditor
Those with a credit card balance may have access to some personal savings, but not enough to fully clear their debt. Once the customer has defaulted, financial institutions sell-on this debt to a collection agency for 20-30% of its value and write it off against taxes. Whilst they will pursue the debtor for full repayment, an opportunity exists to offer a lower amount as a full-and-final settlement. Offering 40-50% of the amount owed to a collection agency means that they have made a profit. This bankruptcy alternative is only plausible if a debtor has savings.
Insolvency alleviates financial difficulties, but a private agreement with a creditor, debt settlement or a Debt Management Plan (DMP) may provide a more viable bankruptcy alternative. It is important to consult a qualified debt counselor before proceeding with any debt solution.
Sources
(6/3/2009). "Bankruptcy filings rise to 6,000 a day as job losses take toll." USA Today.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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